Unit F581: Markets in Action (Microeconomics) FULL REVISION NOTES

MARKETS IN ACTION NOTESTHE REASONS FOR INDIVIDUALS, ORGANISATIONS AND SOCIETIES HAVING TO MAKE CHOICESEconomics is the study of how to allocate scarce resources in the most effective way.DESCRIBE WHAT ECONOMISTS MEAN BY `THE ECONOMIC PROBLEM'This is the fact that resources are scarce in relation to wants that are unlimited, leading to choices having to be made.UNDERSTAND THE DIFFERENT FACTORS OF PRODUCTION AS ECONOMIC RESOURCESFactor of production: the resource inputs that are available in an economy for the production of goods and services.1. Land: natural resources in an economy2. Labour: the quantity and quality of human resources3. Capital: Man made aids to production4. Entrepreneurship: the willingness of an entrepreneur to take risks and organise productionThe amount of output produced in a period depends upon the inputs of factors of production.EXPLAIN HOW SPECIALISATION CAN BE USED TO ADDRESS THE PROBLEM OF SCARCITYSpecialisation is the concentration by a worker or workers, firm, region or whole economy on a narrow range of goodsand services. Consequently, output per employee or productivity is increased. Specialisation opens up the possibility oftrade.Division of Labour: the specialisation of labour where the production process is broken down into separate tasks. Benefits Drawbacks Increase in the output of goods and series when If a country has finite resources, e.g. oil, copper, when compared to circumstances where each country is there run out, the economy is likely to suffer unless self-sufficient. It has globally raised living standards since revenues earned have been invested wisely. there is more output from a particular volume of resources. Widening range of goods available Deindustrialisation ­ in the UK, many people are jobless due to cheap imports Exchange between developed and developing economies. Bad weather may wipe out a whole years crops reducing Trade has been important in facilitating export led incomes and creating widespread economic chaos growth for China, Thailand, Malaysia + new members of the EU. Trade permits countries to specialise in products which Taste or needs of consumers may change leaving a they are able to make efficiently country's exports vulnerable Political factors may result in risks due to specialisation. World's economies heavily rely on each other so any unplanned shocks to system are likely to be more acutely felt in a specialised economy.UNDERSTAND THE ROLE OF MARKETS IN ALLOCATING SCARCE RESOURCESEconomic system is the way in which production is organised in a country or group of countries. The choices that aremade and how they are made is determined by the economic system of a particular country. The economic system isused to describe the means by which a country's people, organisation and government make decisions with respect to: What goods and services are to be produced How these goods and services are produced Who should receive these goods and servicesTypes of economic systems:

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Market economyResources are allocated by the forces of demand and supply through the price mechanism. Decisions on how resourcesare to be allocated are invariably taken by millions of people and thousands of firms. The government has little or nodirect involvement in this process. Households and firms interact as buyers and sellers. Price and the free operation ofthe price system are central to the way in which resources are allocated2.…read more

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Diminishing returns occurs because not all factor inputs are equally suited to producing differentgoods and services. Reallocating scarce resources from one product to another involves an opportunity cost. If we go back to the PPF diagram, if we increase our output of Good X (i.e. a movement along the PPF from point A to point B) then fewer resources are available to produce good Y. Because of the shape of the PPF the opportunity cost of switching resources increases ­ i.e.…read more

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PPFs can also be used to show the difficult choices that have to be made by many developing economies.Such economies invariably have low standards of living, expanding populations, little or no economicpotential. Consequently, scarce resources have to be allocated to meet present needs at the expense ofinvesting in capital goods that would increase economic potential in the longer run.Positive statement is a statement about what is i.e. a fact.Normative statement is a statement about what ought to be.…read more

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EXPLAIN HOW DEMAND IS INFLUENCED BY PRICE AND OTHER FACTORS SUCH AS INCOME, THE PRICES OF OTHERGOODS, AND CHANGES IN TASTES AND FASHION;Factors that shift the demand curve: WASPTICWeatherProducts such as umbrellas will see a high demand on rainy days however there will not be as muchdemand for umbrellas on sunny days. Similarly, ice creams are in high demand on warm days rather thancold days.…read more

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ANALYSE THE DIFFERENCE BETWEEN SHIFTS IN DEMAND AND A MOVEMENT ALONG A DEMAND CURVE;A change in any of the non-price (wasptic) factors affecting demand will lead to a shift in the position of thedemand curve. Do not confuse this with a movement along the demand curve, which is due to a change inprice alone.…read more

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UNDERSTAND THE FACTORS THAT WILL INFLUENCE THE SUPPLY OF A PARTICULAR PRODUCT, INCLUDING THEIMPACT OF CHANGING COSTS OF PRODUCTION ON SUPPLY;FACTORS THAT SHIFT THE SUPPLY CURVE: PINTSW ithC hipsProductivityIncreased productivity can shift the supply curve to the right. While, decreased productivity can shift thesupply curve to the left.Indirect TaxesAn increase in taxation will be passed on to the consumer through increased prices. In turn, increasedprices will affect the willingness of a producer to supply.…read more

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Elasticity is the extent to which buyers and sellers respond to change in market conditions.Price elasticity of demand (PED) : the responsiveness of the quantity demanded to a change in the price ofthe product.…read more

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­ which is obviouslynot good news for sellers as it would decrease their profit margin.Price elasticity of demand Price increase, total revenue...…read more

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PES<1: Elastic 0<PES<1: Inelastic PES=1: Unit elasticDeterminants: Availability of stocks of the product Availability of factors of production Time periodBusiness Relevance:Where it is possible for firms to hold stocks in anticipation of a price rise, so if a price rise is expected, firmsare advised to have good stock availability.…read more